Who's responsible for this?

[TommyGG]

Hello,

We are a small startup in the UK running for about 2 years now. We're doing well and this year end our revenue was over £300,000.

We hired a chartered accountant in early 2012 to help as we are both clueless on accounting and want to be safe. We seem to be paying him in the region of £1,500 - £3,000 per year.

Here's a short timeline:

• Got an accountant, and set it up so all HMRC correspondence goes to his office
• In June 2012 we emailed our accountant and asked "Should we go ahead and register for flat VAT scheme?"
• Reply from accountant was "Assuming the rate is approved, it would appear to your advantage to use it because your VAT inputs are quite low."
• We registered for VAT as we were over the threshold, and we signed up for Flat VAT at 12%-1% bonus rate

On 20th of December 2012 we met with our local MP Vince Cable to discuss VAT as the HMRC website was very out of date about if who we should charge VAT to. We received a letter from the treasury stating that:

1. If the customer is in the UK we always charge VAT
2. If the customer is an individual in the EU we charge VAT
3. If the customer is a business in the EU we don't charge VAT
4. If the customer is outside the EU we don't charge VAT

We emailed our accountant with a scan of the letter, and these exact bullets asking if our understanding of it was correct or not. He replied "In my opinion your understanding 1-4 below is correct. For number 3 you should obtain their VAT reg. No."

So I book kept with the above understanding. I thought that there are 2 groups of customers, those you charge VAT to and we charge 20% to, and the VAT exempt group. The group we charge VAT to, we only pay 11% VAT on those sales because we are on flat VAT.

Now is our year end (May 2013). I haven't filed any VAT returns with HMRC as I wasn't aware I was meant to be doing this (we got a couple of invoices from HMRC VAT related which I paid, I thought that was all we had to do). I tried to file the Aug-Sep 2012 return, and got stuck on some questions so emailed our accountant for help.

He phoned me back straight away and said:

- We're going to be fined for filing these VAT returns late
- We definitely shouldn't be on flat VAT scheme, the reason being the majority of our sales are VAT exempt.

We're pretty upset now because our accountant has told us that our VAT bill would be considerably smaller if we were NOT on flat VAT. We asked him if we should go on it, he said yes, then we also asked confirmation on our understanding of who we should and shouldn't charge VAT to. Now we're going to be fined a lot by HMRC, and have a much bigger VAT bill than we should have had. I thought our VAT bill would be around £10,000 (as a majority of our sales are VAT exempt) but now we're looking at a VAT bill of £50,000+ because flat VAT apparently applies to ALL sales. Ontop of the £40,000 additional tax we have to now pay for being on the wrong scheme, we are going to be fined a lot of money.

I don't really know what we should do now. He charges £70 p/h and has told us that this could take a while to sort out.

We're just a small startup in the UK and all this VAT stuff is a real pain in the ass, I thought getting an accountant would save us from all this headaches and fines but apparently not.

Do we have a case to contest his fees on the grounds of his advice was bad? It appears he's totally misunderstood our needs as a client. He also appears to be lacking any experience or understanding of our business, we are a software company and we sell globally.

What I expected him to have done:

1. Understood that our business sales are mostly VAT exempt and tell us that Flat VAT is a bad idea
2. If we did go Flat VAT, when we received letter from treasury explaining VAT for us better he should have said "yes it's correct, but it's irrelevant to you as you're on flat VAT". This would have been an acceptable time to spot the problem and resolve it
3. Instructed me clearly that I should be filing VAT returns (would he of been receiving letters from HMRC telling him we're late filing the VAT returns? We didn't get anything like that through our door)

We just don't know what to do now we're lost

 

[StevensOnln1]

If your accountant is a member of a professional body, they will have a complaints procedure. This would also require them to have professional indemnity insurance which you may be able to make a claim against.

Sent from my GT-P1000 using UK Business Forums

 

[Deleted member 162294]

Yes he did give you bad advice. Either he is lazy or he overextended himself by trying to look after too many clients and didn't pay enough attention to yours. Maybe he doesn't have experience with clients who sell internationally. In any case it was bad advice.

Though I did all of this research myself before even approaching an accountant. I do wonder if its a director's responsibility to understand the basics of VAT law.

 

[TommyGG]

@Phish I found the VAT law totally inaccessible to someone not trained in accounts and is the primary reason we hired an accountant.

The literature on the HMRC website in regards modern online digital business is incredibly ambiguous and old fashioned and required correspondence with our MP and the treasury to get any definitive answers, which to me are still confusing.

If it's not a chartered accountants responsibility to guide us through all of this then their role is mostly redundant.

 

[teddys]

From the information available:

1. Flat rate scheme doesn't appear to be suitable considering your business model. You could leave the scheme immediately which would put you on to the standard rate scheme then.

2. Before you do that it is advisable to do some simple maths before deciding to join or not to join FRS. Simply put, if you're currently paying 11% flat rate on £300k (FRS is usually for business turning over up to £150K though!) your vatable purchases should be less than £165k to make any financial sense out of it. Ideally you could work out the net VAT payable if you're on a std scheme v what you're paying on FRS.

3. I can't comment on what the accountant did or didn't do but if you have a strong (e.g. genuinely believed the accountant to be acting on your behalf by virtue of the terms of engagement) reasonable excuse you could argue this before the HMRC so penalties/fines could be reduced. Your ignorance of the substantive law or the procedures is no excuse!!

4. I would like to think that your priority should be to put the VAT affairs in order first. For that purpose you might want to change your accountants firm.

 

[Tom McClelland]

@Phish I found the VAT law totally inaccessible to someone not trained in accounts and is the primary reason we hired an accountant.

The literature on the HMRC website in regards modern online digital business is incredibly ambiguous and old fashioned and required correspondence with our MP and the treasury to get any definitive answers, which to me are still confusing.

If it's not a chartered accountants responsibility to guide us through all of this then their role is mostly redundant.

I'm with you on this one. Understanding the basics of charge 20% on sales and reclaim the invoice VAT on purchases for a normal business is something that I'd expect most directors to master for themselves. But the arcana of FRS and export sales lie well beyond that and in the realm of appropriate professional advice, which it seems that you attempted to obtain.

The only alarm bell I have about your part in the affair is that no VAT returns were filed. It is reasonably common knowledge in business that these are a quarterly requirement. But your accountant should have picked this up too, and far more easily than you.

 

[Deleted member 162294]

@Phish I found the VAT law totally inaccessible to someone not trained in accounts and is the primary reason we hired an accountant.

The literature on the HMRC website in regards modern online digital business is incredibly ambiguous and old fashioned and required correspondence with our MP and the treasury to get any definitive answers, which to me are still confusing.

I do agree with you on that point, it is very badly put together. I had to read about VAT law from 6-7 different sources until I had a firm grasp of it.

Some times I wonder if there would be more businesses in the UK if it wasn't so obfuscated, and is it the way it is so that more people turn to accountants? I'm still not 100% sure on how acquisition tax works in regards to imports that have been zero rated coming from an EU business that's been registered for VAT.

 

[RTI-man]

Although being of no use to you what so ever as far as the rules around VAT I can confirm (from the other side of the fence) the HMRC standing as far as blame is concerned.

Im afraid, the responsibility lies with yourself, any penalties, interest etc would be applied to the company because the "agreement" as such is between you and HMRC. The fact you use a middle man is neither here or there to the tax man.

So in this case it is yourselves that would be liable but I'd argue that, as Stevens pointed out, there should be recourse through any professional body (if theyre not a member of one then youve not done your homework properly when selecting them).

What I would say is to contact HMRC immediately and inform them of the situation, this will start the "non compliance" case sooner but will look far more favourably than if they come knocking (it will also help reduce any interest applied).

 

[Tom McClelland]

It is also worth checking that all your purchases are within the UK. My understanding (and I'm sure an accountant will correct me if I'm wrong) is that any reverse charge VAT purchases, (and a common example would be Google Adwords bought from Google Ireland) also have nasty FRS implications.

 

[TommyGG]

Thanks for all the advice everyone. We really appreciate it.

We're happy to swallow any fees for late filing of VAT return, we can live with that and I admit it's a mistake on my part. As far as I can tell the fees aren't over the top and we can put it down as a lesson learned. Perhaps it's better they are late anyway, otherwise I would have been filling them out completely wrong assuming we only pay 11% on VATable customers which could of had worse implications.

I'd like to phone the HMRC as recommended here but I don't know who to phone, what to say, and I wouldn't want to do anything that could sabotage our accountants efforts to remedy the situation. Does anyone have advice?

The whole reason we got an accountant was so we didn't get in these sorts of messes, all we both want to do is develop our product and services and bring in more revenue, not spend days and days worrying and sorting all this stuff out. I definitely think the badly written tax laws and overly complicated VAT laws are putting new british businesses like ours at a distinct advantage. We've talked about moving to America before as it seems like they have a better tech culture and everything would be a lot simpler to run from over there.

 

[TommyGG]

Just phoned up HMRC, they told me:

- Our software counts as 'services' and not goods
- VAT is NOT due on sales of services outside the scope of VAT, even if you're signed up to Flat Vat scheme

It's good we got clarification, I think what's happened is our accountant assumed our sales are for 'goods' and not 'services' which would require VAT payment on all sales.

It's slightly infuriating, as I sent him a copy of a letter last year from the HMRC clearly stating that we are supplying services and not goods.

Hopefully at least the situation can resolve without much more pain and anxiety now. Once this mess is cleared up we're definitely changing accountant.